Choice of Entity: Sole Proprietor, LLC, S Corporation or C Corporation
Choosing an entity is one of the first decisions a business makes and one of the least often revisited. It is usually made quickly, on someone's recommendation, before there is any revenue to test it against. Then it stays, long after the business it was chosen for has changed. The right answer depends on how much the business earns, how much the owner takes out, who else owns part of it, and what happens when it is eventually sold.
We help you evaluate the tax advantages and disadvantages of the options, and revisit the decision when the business changes rather than only at the start.
The options we compare
- Sole proprietor
- Single-member LLC
- Multi-member LLC
- General partnership
- Limited liability partnership
- S corporation
- C corporation
What decides it
- Self-employment tax: Usually the largest single difference between structures for a profitable owner-operated business
- Reasonable compensation: What an S corporation owner who works in the business has to pay themselves through payroll, and what happens if that number is wrong
- Multiple owners: How profits, losses and distributions are split, and what the operating agreement has to say for the tax treatment to hold
- Fringe benefits and retirement plans: Which structures let the owner deduct what, and which quietly do not
- The eventual exit: How the entity affects what is left after a sale, which is decided years before the sale happens
If an S election makes sense
We prepare and file the election paperwork. If payroll is part of what we handle for you, we set that up. If you would rather use your own payroll provider and manage that provider directly, that works too, and we would only need copies of the payroll returns and the tax returns.
When to look again
- Profit has grown: The structure chosen when the business was small is often the wrong one once it is not
- Owners are joining or leaving: Adding a partner or buying one out changes both the tax and the paperwork
- You are adding employees: Payroll, benefits and worker classification interact with the entity choice
- The law changed: Federal tax legislation regularly moves the line between structures, and the last comparison you did may predate it
An entity change is a planning decision with a deadline, so it belongs in tax planning rather than in the return.